Fiduciary News: How Can a 401k Plan Sponsor Continue to Contribute to a Quarantined Employee’s 401k Account?

As published in FiduciaryNews.com

March 10 00:032020 by Christopher Carosa, CTFA

Depending on the state a 401k plan sponsor is operating in, they may be finding their employees can no longer work on-site. This is done with safety in mind. But, depending on the circumstances, it may have a negative impact on employees’ ability to retire in comfort. This is especially true if the employee is no longer eligible for a matching contribution from the company.

“As long as employees are getting income it could be matched,” says David S. Richmond, Chairman & Co-Owner, Richmond Brothers, Inc. Jackson, Michigan. “So, if work from home hours count, or benefits guaranteed from the government count, they would have income and therefore could be matched.”

But what happens if the employer no longer pays the employee as a result of a state-mandated shutdown?

“Employee contributions are based on the amount of pay received,” says Brian Berkenhoff, Owner and Financial Advisor at Birch Investment Management in Brookings, South Dakota. “If an employee is furloughed without pay, they won’t be able to contribute. If an employee is collecting income while working remotely, they will still be able to contribute.

A plan sponsor should check their plan documents to see their options. If the employer makes non-elective contributions on a payroll-by-payroll basis they may still need to be made during a furlough.”

While the situation is too recent to get good data, anecdotal evidence suggests at least some plan sponsors are trying their best to keep their employees’ best interest in mind.

“What I’m hearing is that most employers are stepping up and doing the right thing for their employees from a compensation standpoint,” says Jose Cuevas, Vice President and Director of Financial Planning for Wisdom Investments in Rolling Meadows, Illinois. “There are employers continuing to pay employee wages along with special bonus payments while we are in this crisis. These payments allow employees to continue to contribute to their retirement plans along with receiving their employer match. In similar market situations in the past, some employers have also stepped up and made special contributions to the retirement plan for eligible employees, so that they could increase employee morale and demonstrate their appreciation for their employees.”

What an employer can do depends on what its plan document permits. “This can be tricky and every employer should review their 401k Plan Document and confer with their third-party plan administrator before taking any action,” says Katharine Earhart, Partner & Co-Founder, Fairlight Advisors, San Francisco, California. While acknowledging she’s not an expert, Earhart suggests “Employers want to be sure they don’t inadvertently create operational errors in their retirement plans and they want to ensure proper service crediting takes place. I believe this is being discussed with Congress at the moment in the larger Retirement Plan Relief bill.”

Perhaps the easiest way for employers to help continue matching employee contributions is to ensure those employees can work from home. This is what Rockland Trust is doing. The company is “by providing hourly employees the tools and technology necessary to continue working from home,” says Boston, Massachusetts based Doug Butler, Senior Vice President & Director of Research Services at Rockland Trust. “These may not be possible for all businesses though, especially small businesses and businesses in certain industries. Some companies also allow employees to borrow against their 401k and repay that loan via payroll deduction. Without a pay check however, people could default on those loans. We are hopeful the Government’s stimulus package will include relief to these types of businesses to help their employees continue to save.”

Are there options if employees can continue to receive compensation? “If that is the case, if the 401(k)/403(b) plan doesn’t provide for it, the employer could amend the plan to provide a discretionary employer contribution for all employees (or all affected employees – pending evaluation of compliance considerations),” says Gregg Levinson, Senior Director, Retirement at Willis Towers Watson in Philadelphia, Pennsylvania. “A non-elective contribution is not based on salary deferral but rather is an employer provided percentage of pay. It can be designed to be a percentage of pay that employees have received year to date. It would likely have to go to more people than were participating for the match to be compliant but it doesn’t necessarily have to cost more than the match … that just depends on the percentage of pay, the employer wants to provide.”

Of course, there may be a less complicated manner to accomplish the same thing. Levinson says “Another option could be to hold the amount set aside for the current match and pay it as match when employees return. They could temporarily redesign the match to enhance to pay these lost amounts (again pending compliance considerations). They could also eliminate any year-end employment requirements that would have excluded some employees from receiving a match.”

For certain businesses, though, present circumstances contain too many uncertainties. “Businesses will be forced to look at their liquidity, and profit-sharing contributions may be one of the first expenses to be suspended,” says Kelly Crane, President & Chief Investment Officer at Napa Valley Wealth Management in Saint Helena, California. “If you’re keeping an employee on the payroll, they meet the annual hours-of-service requirement to be a participant, and you have the liquidity, plan sponsors that continue to match employee contributions will likely gain employee loyalty. However, if the employee cannot report to work and remote work is not an option, then keeping them on the payroll and continuing to match contributions might not be in the company’s best interest for short-term survival.”

“Until this crisis passes,” says Michael Gerstman, CEO of the Dallas-based financial planning firm, Gerstman Financial Group, LLC, “small and medium size businesses will not be contributing, as survival of the company will be the singular objective. I think most people realize how blessed they will be if they have a job to come back to once there’s a return to normalcy.”

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary Solutions,  Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.